Tax, spending divide hampers deficit cut push

President Barack Obama leaves the lecturn following remarks speaks about federal worker wage freezes in the Eisenhower Executive Office Building near the White House in Washington, November 29, 2010.

WASHINGTON (Reuters) - Two more proposals to cut the budget deficit emerged on Monday, underscoring a deep divide on taxes and spending that is likely to blunt the impact of a plan due in two days from a presidential panel.

The deficit and the national debt have soared in recent years.

The White House sharpened its focus on the issue on Monday, saying President Barack Obama will propose a two-year freeze on the pay of civilian federal workers.

The freeze would be more of a gesture than a substantive change, however, saving $2 billion from the current year's estimated $3.8 trillion budget.

Annual budget deficits in recent years have approached 10 percent of GDP, the highest levels seen since World War II, adding steadily to the record $13.6 trillion U.S. debt.

Assigned to come up with a comprehensive deficit strategy, a commission was set up earlier this year by Obama. It will meet on Wednesday to release and discuss a final report.

Commission members talked by telephone about their views over the Thanksgiving holiday. They had been expected to meet on Tuesday, but the commission said on Monday only one-on-one meetings between the co-chairman and members will occur then.

Little progress was seen for now on bridging a split between Democratic commission members who want to raise taxes and protect social program spending, versus Republicans opposed to tax increases and supportive of sharper spending cuts.

The Medicare and Medicaid health programs -- major drivers of long-term deficits -- are points of contention, as are defense spending, Social Security pensions, and politically sensitive tax breaks such as the mortgage interest deduction.

The chairmen of the Obama commission -- former Republican Senator Alan Simpson and Erskine Bowles, who was chief of staff for President Bill Clinton -- on November 10 unveiled their own set of recommendations. These, with revisions still being negotiated, were expected to form the basis of a final report to be voted on by the commission on Wednesday.

Most experts on the budget deficit agree that both tax increases and spending cuts are needed in any serious strategy to tackle the deficit and the fast-mounting national debt. But agreement on that has eluded the commission so far.

LIBERAL GROUPS UNVEIL REPORTS

A separate report issued on Monday by Our Fiscal Security, a coalition of liberal groups, called for restraining healthcare cost growth, cutting defense spending, and raising the cap on earnings subject to Social Security taxation.

It also recommended taxing capital gains and dividends as ordinary income, instead of at the present lower rate of 15 percent; capping itemized deductions; changing the charitable giving deduction to a credit, and limiting the deductibility of corporate debt interest payments for financial firms.

Our Fiscal Security includes the following groups: the Economic Policy Institute, The Century Foundation and Demos.

They additionally urged a financial speculation tax; a tax on roughly 60 major financial institutions with assets above $50 billion that benefited from 2008's Wall Street bailouts; a tax surcharge on millionaires, and a higher gasoline tax.

Another liberal group -- the Citizens' Commission on Jobs, Deficits and America's Economic Future -- put forward some similar proposals to "accelerate the economic recovery while achieving a stable and sustainable level of debt by 2015."

It said any plan to cut the deficit should be deferred until unemployment, running at 9.6 percent, drops to 5.5 percent. Otherwise, spending cuts and tax hikes could undermine the nation's fragile economic recovery, it said.

The group called for more federal aid to states, new steps to spur bank lending and expiration at year-end of tax cuts for the wealthy put in place by former President George W. Bush.

"We must remove Social Security from 'deficit cutting' exercises, increase its revenues, provide modest benefit increases, and assure the public that its $2.6 trillion trust fund assets will not be used for other purposes," it added.

(Reporting by Kevin Drawbaugh; Editing by Jan Paschal)